Why Local Governments Provide Services

If one can make a product or provide a service for a cost that is lower than the price people will pay for that product or service, someone is likely to make that product/provide that service. The greater the gap between the cost of production and the price, the more likely it is that someone will get into that market (and the more likely that multiple folks will get into that market, creating competition).

It always has been true that the difference between cost and price had to be of a certain size (given a number of other considerations) to attract production efforts and generate supply. The size of the demand matters, too. If I’m not selling a lot of my product, I need a bigger cost/price differential. If I’m selling a lot of product, the difference between cost and price on a per-item basis can be small; I’ll make what I need on volume.

But if the cost/price differential isn’t sufficiently large, or the cost actually exceeds the price, that product or service won’t be provided at all . . . at least not until conditions change.

A recent illustration of this last point is the harvesting of oil and natural gas through “fracking.” Geologists and folks in the petroleum industry have known about vast deposits of oil and natural gas trapped in layers of shale and other geological materials for a long time. Not much was done about them, however, because the cost of recovering these deposits was greater than the price that could be charged for the petrochemicals (including gasoline) that would be produced from them.

In recent years, that calculation has shifted favorably (from a profit-making standpoint). As a result, distant and historically quiet areas like western North Dakota have seen an explosion of economic activity and employment in the early part of this century.

Government has a role to play in the firing up and maintaining of this economic engine. Indeed, one might say government has three roles, two of which are most familiar.

The government underwrites the development of an industry by building/operating/maintaining infrastructure, by funding research that, in time, spurs new ideas of industrial significance, and by creating financial incentives to stimulate business activity in the targeted industry. See, among myriad examples, the expansion of the railroads across the continental U.S. in the 19th century.

The government regulates the industry through taxes, fees, rules, regulations and penalties. The surprise (to many) is that these activities of government often foster industry, rather than cripple it. Broadcasting in the 1920s is a case in point. The emergent radio broadcasting industry of that era nearly destroyed itself by competitive practices that increasingly alienated listeners. Leading voices in the various affected industries actually begged Congress to make them behave (which Congress obligingly did), and radio entered into a golden age of creativity, social impact and financial success.

The third role government sometimes plays is one that often stirs controversy as well.

The government provides the service itself, stimulating demand in related industries and providing underserved citizens with service.

There are a number of services local governments provide that could be (and in some cases are also) provided by the private sector. Most often, these services are provided by the government because the private sector, driven by the cost/price differential, would not deliver them equitably. A road-building company might build a fine asphalt ribbon for a wealthy neighborhood that assessed itself for the privilege. A road building company would be much less likely to lay that fine asphalt in an impoverished neighborhood that couldn’t afford to pay what even a rudimentary road might cost.

The same logic can be applied readily to schools, police and fire protection, parks, recreation, transit, street lighting, pollution control, water, sewer . . . a vast range of services local governments often provide precisely because there is a sense that all the people should have such a service, but the numbers don’t quite work.

Despite the precedents, there’s no small amount of drama and accusation by private-sector voices whenever the public sector considers providing a service the private sector also provides. Fair enough; there are reasons to prefer private sector delivery of some services, and there is a legitimate concern about the potential competitive advantage a government-run service provider would have over its private sector competitors.

But if a service is not being provided equitably, and market conditions do not seem to support equitably expansion, the government may indeed have a role to play, not only for the sake of the underserved customers themselves, but for the sake of the whole nation.

Next: The Digital Divide and Municipal Broadband

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3 Responses to Why Local Governments Provide Services

There is a belief among legislators that the private sector is much more efficient and can provide many services currently provided by government at a lower cost. In some cases that may be true but in actual cases the results are mixed. Generally speaking, since government already has the infrastructure and equipment and employee compensation is significantly lower, it has the natural low cost advantage. If government is inefficient and costs are too high then, by all means outsource as long as controls or penalties are in place to insure the provider can’t cherry pick customers and service continues even if the private industry provider is mismanaged and losing money.

[…] into areas of service provision in which the private sector also is engaged on its own. As I wrote earlier this week, when a service isn’t being provided equitably or adequately because of market conditions, some […]